Free will. Free market. What's so hard to understand about that?

I’m posting this with the caveat that one can always cherry pick sound bytes to make a point. Nevertheless, whatever else may have been said, or by whom, the record shows that Republicans have tried repeatedly to curb Fannie Mae and Freddie Mac, while Democrats have strenuously resisted tighter regulation (or even oversight) of the two entities at the root of the currrent financial crisis.

I know there were Republicans in the pocket of Fannie and Freddie as well. And, if anybody can provide a counterpoint video that shows Democrats trying to curb their excesses, and Republicans vehemently opposing closer scrutiny, I’ll be happy to post that as well.

We may be focusing too narrowly on the presidential race in this election, when we should be taking a good hard look at Congress.

Hoping isn’t what’s going to bring about the change that we desperately need.

What we are witnessing today is not a failure of the free market. It is the failure of social engineering as economic policy. And it’s a disaster of epic proportions.

Nobody’s disputing that this disaster was precipitated by irresponsible lending practices, or that Fannie Mae and Freddie Mac were at the root of the whole debacle, though the ramifications have now spread far beyond them. What people are arguing about is the interpretation of the events that led us here, what should have been done differently, and what should be done to contain the fallout now that the pyramid scheme has blown up.

Hard core free market proponents, like me, will say that Fannie Mae and Freddie Mac were a mistake from the beginning. The government should have kept its nose out of the home mortgage industry, and not attempted to manipulate the market to enable people who couldn’t afford houses to buy them. On the other hand, proponents of the “government is good” and “more is better” philosophy will say the problem was that there wasn’t enough government manipulation. (Could there ever be?)

But, curiously, in 2005, when Alan Greenspan told Congress that Fannie Mae and Freddie Mac were “placing the total financial system of the future at a substantial risk,” and the Senate Banking Committee proposed a reform bill requiring tighter regulation of those two entities, the Democrats opposed it, on a strict party line vote, crushing the bill before it got out of committee. Barack Obama, Hillary Clinton, and Christopher Dodd all voted against it. (John McCain, incidentally, was one of the co-sponsors of the bill.)

Huh? Democrats voting against more regulation? Republicans voting for it? One would expect Republicans to favor less regulation, as regulation is antithetical to a free market. But, in this case, it already wasn’t a free market. A free market has its own natural checks and balances. Once the government has removed or impaired any of those natural checks and balances, the market loses its equilibrium and bad things can happen. What the Republicans were attempting to accomplish by proposing tighter regulations on Fannie Mae and Freddie Mac was to artificially restore the natural constraint that had been removed by shifting the risk from the lenders to the taxpayers.

In a free market, the desire for profit is counterbalanced by the aversion to risk. If the risk incurred by an investment or loan outweighs the profit potential, it’s not in the investor’s/lender’s best interest to participate, so the transaction doesn’t occur. However, when the government removes the risk associated with a bad transaction, by assuming the risk itself, then the natural constraint of risk aversion that would apply in a truly free market is eliminated, and investors will take risks that would otherwise be unacceptable. That’s what happened in the case of Fannie Mae and Freddie Mac. The taxpayers assumed the risk, and Fannie Mae and Freddie Mac made unsound investments.

In today’s mortgage industry, mortgages are always packaged up and sold to aggregators, who sell them to bigger aggregators, with Fannie Mae and Freddie Mac at the top of the pyramid as the granddaddies of all aggregators. Because Fannie and Freddie had no risk aversion, lenders further down the chain were free to take risks they wouldn’t otherwise take, knowing the aggregators would buy up the high risk (subprime) mortgages anyway. This was intentional.

Affordable housing is a euphemism for making home loans available to people who would not qualify for a loan under a free market system. The reason someone would not qualify for a loan in the free market is because they present too high a risk. In other words, they can’t afford to pay off the loan. Fannie and Freddie represented a wide scale experiment in social engineering. It was an attempt to use federal policy to “level the playing field” so anybody could “afford” to buy a home whether they could actually afford to pay for the home or not.

When the Republicans wanted to tighten the reins on Fannie Mae and Freddie Mac, and preclude them from making excessively risky investments, it would have meant they could no longer fulfill the mission of making homes “affordable” to those who couldn’t afford them. That’s why the Democrats opposed the bill. And that’s why we’re where we are today.

The great experiment in social engineering has now failed. Dramatically. And, because the experiment was backed by the full faith and credit of the U.S. taxpayer, it is our money, and our future, that is getting called in as collateral for this grand social experiment.

Anybody who blames this failure on the free market is either dishonest or naive. It was liberal social policy masquerading as economic policy that got us into this mess. If you want to see more of the same in the future, there are plenty of Democrats still in Congress. And there’s one running for president, too.

Many people are insisting that the government has to bail out AIG because, in the current situation, if the government didn’t step in, the result could be a worldwide depression. I understand that. I still think it’s the wrong thing to do.

If the government doesn’t bail them out, we’re going to have an economic crisis. But we’re going to have one anyway, whether they bail them out or not. The money with which the government bails out these failed institutions will be borrowed from other countries. Then the taxpayers will be stuck with the bill for not only the bailouts, but the interest on the money to bail them out. And, when the bill comes due to the taxpayers, where will all that money be going?

The situation is going to get worse, whichever way we play the cards. But the way in which it gets worse will be different, depending on what we do now. And that’s important. Because our nation’s future depends on it. Do we want to let a failed system collapse, knowing it will have a seismic impact on the whole world economy? That would be bad. Or do we want to indenture our nation’s future to other powers whose interests are not necessarily aligned with ours? What other option is there?

This whole gigantic mess was caused by wide scale irresponsible borrowing. How is borrowing on an inconceivably more massive scale going to solve the problem? We are already the biggest debtor nation in the world.

Liberals are quick to blame it all on capitalism, but what actually got us here was government meddling. Further government meddling isn’t going to get us out. For years, the Fed kept interest rates low deliberately to fuel the housing bubble. It was a specific federal policy intended to make it easier for first time homebuyers to be able to buy homes they couldn’t otherwise afford. (Now strike the word “otherwise” from that sentence, and there’s the root of the problem.)

Federal policy was designed to encourage overspending. It was a government-subsidized Ponzi scheme, with the FHA, FannieMae, and FreddieMac at the top of the heap, backed by the full faith and credit of the U.S. taxpayer. All accountability was shuffled away, through multiple layers of loan aggregation. When people started defaulting on loans that should never have been made, and institutions started defaulting on their debts to other institutions, speculation on defaults (aka “swaps”) to hedge the bad bets became rampant. (That’s what brought down AIG.)

The entire economy, from the top down, is built on debt. At the bottom of the pyramid are millions of individuals borrowing from banks, who borrow from government sponsored agencies, while the government borrows from foreign countries, granting them financial power to wield over us in the future. Even as individuals are going bankrupt from bad debt, the nation is sinking ever deeper into deficit spending. The problem is systemic. The madness has to stop.

This country is headed for disaster because of fiscal irresponsibility at every level, encouraged by those who think the government can just manipulate the economy a little bit more, just another tweak here or another pinch there. A push here or a squeeze there. But it’s all an illusion as long as the debt keeps growing.

Debt is dangerous. We are selling our sovereignty, like a drunken wastrel squandering his children’s inheritance. Our deficit spending increases exponentially decade after decade. The national debt balloons. Instead of having any plan to pay it off, we keep borrowing more.

Stop the presses! (The ones printing up the dollars, that is.) Stop the borrowing. Stop the spending. Stop overregulating industry and labor so corporations have to send jobs overseas to stay competitive. Stop the subsidies for farmers not to grow crops. Stop all the greasy earmarks. Stop foreign aid. We need our leaders to sit down and acknowledge the fact that the nation is broke — worse than broke. We have a negative net worth!

We cannot go on as we have been. That’s a fallacy. Prolonging the inevitable just gets us deeper in the hole we’re going to have to eventually dig ourselves out of. Let’s stop now, and start demanding fiscal responsibility from our leaders and ourselves.

People don’t learn from their mistakes. They learn from the consequences of their mistakes. If you shield them from the consequences, they’ll make the same mistakes again. I say, no bailouts for lenders or borrowers or gamblers with other people’s money! Let the market correct itself, as painful as that correction will be, and then laissez-faire.

I recently read an article titled Cold Meal for Kids Behind on their Lunch Fee, about kids in public schools in Snohomish County, Washington, who forget their lunch money. The standard practice is to give them credit so they can get a hot meal anyway. Up until recently, the school districts made no attempt to recoup that money. Apparently, that led to a lot of kids taking advantage of the system and, last year, the Edmonds school district alone lost $207,763 in unpaid lunch money.

Because of tighter budgets, they’re now trying to change that policy. In the Edmonds school district, after a student exceeds $10 in unpaid lunches, the next time they forget their lunch money, they’re given a cheese sandwich (at no charge) instead of credit. In the Mukilteo school district, students can charge up to five breakfasts and five lunches before their credit is cut off. After exceeding the limit, the school gives them a sandwich, vegetable, fruit, and milk (all at no charge).

After implementing the new policy, the Edmonds school district recouped $45,269, in the first five days, from 961 students (an average of $47 each) who had apparently made a habit of forgetting their lunch money before the credit limit went into effect. These aren’t kids who can’t afford to buy lunch. Those kids qualify for free lunches through a government program for low-income families. These are kids who either don’t bother to remember, because it doesn’t matter, or who have discovered better things to do with their lunch money than buy lunch.

What these kids have been taught is that, if you don’t have the money to buy something, you can just say “charge it,” and then it’s free! And there’s no limit to how much you can charge without ever having to pay it back. Yet we wonder why kids grow up with no sense of fiscal responsibility (and why we have an epidemic of people swimming in credit card debt, spending more than they earn, buying houses they can’t afford, and defaulting on their mortgages).

One might wonder why the schools hadn’t figured this out sooner. But, now that they have, the communities are up in arms. How can you take away a child’s hot lunch and give them a cold sandwich, instead? It’s heartless! When I went to school, I used to make my own lunch every day. A cold sandwich was pretty standard. If I overslept, and didn’t have time to pack a lunch, I didn’t eat lunch that day. But I made sure I got up earlier the next day.

God forbid anybody should expect a kid to make their own lunch these days. (Next they might be expected to make their own bed!) Instead, we’re teaching them that they’re entitled to a full hot meal, at somebody else’s expense, and that it’s an insult to be given a sandwich, a piece of fruit, and a glass of milk. Ironically, it isn’t insulting because it’s a handout, but because they’re entitled to more!

Some people are worried that giving a kid a cheese sandwich might make them ashamed because it looks like they can’t afford to buy lunch. When I was a kid, everybody knew whose parents were richer or poorer than others. Not that it mattered to the kids (at least to most of them). But it was clear from the clothes they wore, the toys they had, and the houses in which they lived. You can’t hide that from kids. That’s life.

But, if a kid does feel a sense of shame at being poor, is that necessarily bad? Throughout our history, that very sense of shame has provided a powerful incentive to many children growing up in poverty to work hard and make sure they don’t stay poor. If we teach our children that poverty is just as good as prosperity, and people who don’t have as much as others deserve to have it given to them, why should anybody strive for anything better?

The article also says “Federal laws aimed at making sure kids eat balanced meals require school staff to review lunches before children eat.” I wonder if they review the lunches of the kids who bring their lunch from home, too. Do they make each kid open their lunch sack so they can peer inside? Do they open up their sandwiches to make sure they’re eating something nutritious and not just Marshmallow Fluff?

The idea seems to be to absolve parents of having to take responsibility for their kids, and to absolve kids of having to take any responsibility for themselves. Instead, it’s up to the federal government to make sure everybody gets a free lunch. What kind of a lesson is that to instill in impressionable children?

As energy prices skyrocket, so does inflation. Our personal budgets, as well as our national economy, are shriveling up. While all Americans feel the pain of higher fuel prices, and most understand the correlation between energy prices and the inflation that’s eroding their buying power and chipping away at their standard of living, not nearly as many recognize the potential impact of energy dependence on national security. Much of the world’s oil is controlled by forces that are hostile to us. Our precarious energy position makes us very vulnerable.

We need to produce more energy at home. There are two reasons we aren’t doing that today. The first reason is the cost of R&D. The U.S. has a lot of shale oil, but it’s expensive to extract. However, with the prices of oil on the global market today, it’s getting to the point where the return will justify the investment. The other reason we aren’t producing more energy is counterproductive regulations and endless litigation brought about by environmental groups.

There may be enormous reserves of oil in ANWR, but we need to do exploratory drilling to find out where they are and assess how much oil there is. Environmentalists have stymied any attempt to do that, because it might disturb the polar bears. Other countries are taking full advantage of off-shore drilling but our government won’t permit that, because it might disturb the rich and powerful environmental lobbies that help our legislators get reelected.

The environmentalists claim they oppose drilling for oil because they favor alternative energy sources that are cleaner and safer for the environment. But it turns out that the greatest opposition to alternative energy production comes from environmental groups!

Wind power is about as clean as you can get. Environmentalists used to promote it but, once massive wind farms became a reality, environmentalist groups all over the country sprang up with injunctions and litigation to shut them down because of their impact on birds, bats, and even ground squirrels.

Hydroelectric power is another source of clean energy that environmentalists used to tout. But now they want to blow up dams, and have successfully lobbied and litigated to have dams removed, at tremendous taxpayer expense, because of their impact on fish habitats.

Natural gas burns cleaner, with lower emissions than petroleum products, and even the Sierra Club initially came out in favor of it. Yet, all over the country, wherever drilling for natural gas is undertaken, or a natural gas pipeline is proposed to be built, environmentalists rear up in litigation because of speculation about the potential harmful consequences of potential leaks.

Geothermal power is an interesting concept, because it’s clean and safe and permanent. It doesn’t vary with the weather, and it can never be depleted. Yet, the Sierra Club’s Juniper Group is litigating to prevent an exploratory project for development of a geothermal plant on a 5-acre parcel outside Oregon’s Newberry Crater, which is one of the most promising geothermal resources in the world. There is no specific threat to the environment or habitat of any particular species. They’re just concerned that having the project so close to a national monument might have a potential impact on forests or wildlife.

There are many more examples of environmentalists opposing alternative energy. But what does it all mean? They tout alternative energy until it starts to become a reality, and then they start backpedaling and litigating to thwart it. Is it just because they can’t accept the idea that any kind of energy production will necessarily entail environmental tradeoffs? (See What Have Progressives Got Against Progress?) Or is there some other agenda that motivates them to try to block every avenue of energy independence? I believe many of them are simply naive, and haven’t thought it through. But the consequences of their good intentions affect us all.